Corporation Law

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there is otherwise no special or extraordinary form of
resulting injury. (Alitalia v. CA)

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condition and in accordance with the document of
carriage. (Art. 26, WC)

LIABILITY TO PASSENGERS

General rule: 250,000 francs per passenger

Corporation Law

Exception: Agreement to a higher limit (Art. 22(1), WC)
LIABILITY FOR CHECKED-IN BAGGAGE

DEFINITION
A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incident to its existence.

General rule: 250 francs per kg
Exception: In case of special declaration of value and
payment of a supplementary sum by consignor, carrier
is liable to not more than the declared sum unless it
proves the sum is greater than actual value. (Art.
22(2), WC)

ATTRIBUTES OF THE CORPORATION
AN ARTIFICIAL BEING
A corporation exists by fiction of law. Hence, it can
act only through its directors, officers and employees.

LIABILITY FOR HAND-CARRIED BAGGAGE

General rule: 5,000 francs per passenger (Art. 22(3),
WC)
(1) An agreement relieving the carrier from liability or
fixing a lower limit is null and void. (Art. 23, WC)
(2) Carrier is not entitled to the foregoing limit if the
damage is caused by willful misconduct or default
on its part. (Art. 25)
(3) The right to damages under the WC is
extinguished after 2 years from the date of arrival
at the destination or from the date on which the
aircraft ought to have arrived, or from the date on
which the carriage stopped. (Art. 29(1), WC)
The Guatemala Protocol of 1971 increased the limit for
passengers to $100,000 and $1,000 for baggage.
However, the Supreme Court noted in Santos III v.
Northwest Orient Airlines, G.R. No. 101538, June 23,
1992, that the Guatemala Protocol is still ineffective.
(Sundiang and Aquino)
WILLFUL MISCONDUCT
When can a common carrier not avail itself of this
limitation?
(1) Willful misconduct (Art. 25, WC)
(2) Default amounting to willful misconduct (Art. 25,
WC)
(3) Accepting passengers without ticket (Art. 3, No. 2,
WC)
(4) Accepting goods without airway bill or baggage
without baggage check. Carrier guilty of willful
misconduct cannot avail of the provisions limiting
liability but may still invoke other provisions of the
WC. (see Art. 25)

CREATED BY OPERATION OF LAW
Mere consent of the parties to form a corporation is not
sufficient. The State must give its consent either
through a special law (in case of government
corporations) or a general law (i.e., Corporation Code
in case of private corporations).
HAS THE RIGHT OF SUCCESSION
Its continued existence during its stated term cannot
be affected by any change in the members or
stockholders or by any transfer of shares by a
stockholder to a 3rd person.
HAS THE POWERS, ATTRIBUTES AND
PROPERTIES EXPRESSLY AUTHORIZED BY LAW
OR INCIDENT TO ITS EXISTENCE
A corporation has no power except those expressly
conferred on it by the Corporation Code and by its
articles of incorporation, those which may be incidental
to such conferred powers, those that are implied from
its existence, and those reasonably necessary to
accomplish its purposes. In turn, a corporation
exercises said powers through its Board of Directors
and/or its duly authorized officers and agents.

CLASSES OF CORPORATIONS
STOCK CORPORATION
Corporations which have capital stock divided into
shares and are authorized to distribute to the holders
of such shares dividends or allotments of the surplus
profits on the basis of shares held
NON-STOCK CORPORATION
All other corporations are non-stock corporations

Receipt by the person entitled to the delivery of
baggage or cargo without complaint is prima facie
evidence that the same have been delivered in good

One where no part of the income is distributable as

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dividends to its members, trustees, or officers, subject
to the provisions of the Code on dissolution(Sec. 87).

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OTHER CORPORATIONS

CORPORATION CREATED BY SPECIAL LAWS OR
CHARTER
Corporations which are governed primarily by the
provisions of the special law or charter creating them.

PUBLIC CORPORATION
One formed or organized for the government of a
portion of the state. Its purpose is for the general
good and welfare

SUBSIDIARY CORPORATION
One in which control, usually in the form of
ownership of majority of its shares, is in another
corporation (the parent corporation).

PRIVATE CORPORATION
One formed for some private purpose, benefit, aim
or end; it may be either stock or non-stock,
government-owned or controlled or quasi-public. The
test to determine whether a corporation is
government- owned or –controlled, or private in
nature, is if a corporation is created by its own charter
for the exercise of a public function, or by
incorporation under the general corporation law

PARENT CORPORATION
Its control lies in its power, directly or indirectly, to
elect the subsidiary’s directors thus controlling its
management policies.
CORPORATION DE JURE
A corporation organized in accordance with the
requirements of the law.
DE FACTO CORPORATION
A corporation where there exists a flaw in its
incorporation

CLOSE CORPORATION
One whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3)
The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any
class

Rule on De Facto Corporations
The due incorporation of any corporation claiming in
good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which
such corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo warranto
proceeding
Requisites of De Facto Corporation
(1) Organized under a valid law
(2) Bona fide compliance with formalities of law
(3) User of corporate powers
(4) SEC issuance of certificate of incorporation

EDUCATIONAL CORPORATION
One organized for educational purposes.
RELIGIOUS CORPORATIONS
Corporation sole is one formed for the purpose of
administering and managing, as trustee, the affairs,
property and temporalities of any religious
denomination, sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder of such
religious denomination, sect or church (Sec.110)

CORPORATION BY ESTOPPEL
Where a group of persons misrepresent themselves as
a corporation, they are subsequently estopped from
claiming lack of corporate life in order to avoid liability

NATIONALITY OF CORPORATIONS

ELEEMOSYNARY CORPORATION
One organized for a charitable purpose

PLACE OF INCORPORATION TEST
The corporation is a national of the country under
whose laws it is organized or incorporated (Sec. 123).

DOMESTIC CORPORATION
One formed, organized, or existing under the laws
of the Philippines.

CONTROL TEST
A corporation shall be considered a Filipino
corporation if the Filipino ownership of its capital
stock is at least 60%, and where the 60-40 Filipinoalien equity ownership is NOT in doubt.

FOREIGN CORPORATION
One formed, organized or existing under any laws
other than those of the Philippines and whose law
allows Filipino citizens and corporations to do
business in its own country and state (Sec. 123).

Therefore, its shareholdings in another corporation
shall be considered to be of Filipino nationality when
computing the percentage of Filipino equity of that
second corporation.

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In the October 9, 2012 case of Gamboa v. Teves, The
SC held that:

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under Art 2219 (7) if it was the victim of defamation
DOCTRINE OF PIERCING THE CORPORATE VEIL
Piercing the veil of corporate entity is merely an
equitable remedy, and may be granted only in cases
when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend
crime or where the corporation is a mere alter ego
or business conduit of a person.

“Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the
common shares and at least 60 percent of the preferred
non- voting shares must be owned by Filipinos. Of
course, if a corporation issues only a single class of
shares, at least 60 percent of such shares must
necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must
apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any
other class of shares.”

GROUNDS FOR APPLICATION OF DOCTRINE
(1) If done to defraud the government of taxes due it.
(2) If done to evade payment of civil liability.
(3) If done by a corporation which is merely a
conduit or alter ego of another corporation.
(4) If
done
to
evade
compliance
with
contractual obligations.
(5) If done to evade financial obligation to its
employees.

GRANDFATHER RULE
It involves the computation of Filipino ownership of
a corporation in which another corporation of partly
Filipino and partly foreign equity owns capital stock.
The percentage of shares held by the second
corporation in the first is multiplied by the latter’s own
Filipino equity, and the product
of
these
percentages is determined to be the ultimate
Filipino ownership of the subsidiary corporation.

TEST IN DETERMINING APPLICABILITY
General rule: The mere fact that a corporation owns
all or substantially all of the stocks of another
corporation is NOT sufficient to justify their being
treated as one entity. Exception: The subsidiary is a
mere instrumentality of the parent corporation.
Circumstances
rendering
subsidiary
an
instrumentality:
(1) The parent corporation owns all or most of the
subsidiary’s capital stock.
(2) The parent and subsidiary corporations have
common directors or officers.
(3) The parent corporation finances the subsidiary.
(4) The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise causes
its incorporation.
(5) The subsidiary has grossly inadequate capital.
(6) The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
(7) The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
(8) In the papers of the parent corporation or
in the statements of its officers, the subsidiary is
described as a department or division of the
parent corporation or its business or financial
responsibility is referred to as the parent
corporation’s own.
(9) The parent corporation uses the property of the
subsidiary as its own.
(10) The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation in the latter’s interest.
(11) The formal ledger requirements of the subsidiary
are not observed.

CORPORATE JURIDICAL PERSONALITY
A private corporation formed or organized under this
code commences to have corporate existence and
juridical personality and is deemed incorporated from
the date the SEC issues a certificate of incorporation
under its official seal (Sec. 19)
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
Concept: A corporation has a personality separate
and distinct from that of its stockholders and
members and is not affected by the personal rights,
obligations, and transactions of the latter.
LIABILITY FOR TORTS AND CRIMES
As a separate juridical personality, a corporation can
be held liable for torts committed by its officers for
corporate purpose.
RECOVERY OF MORAL DAMAGES
General rule: A corporation has the power to sue in its
corporate name. (Sec. 36)
Exception: Moral Damages cannot be awarded in
favor of corporations because they do not have
feelings and mental state. They may not even claim
moral damages for besmirched reputation
However, a corporation can recover moral damages

INCORPORATION AND ORGANIZATION
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(2) Period extended
(a) For periods not exceeding 50 years in any

PROMOTER
Promoters are persons who, acting alone or with
others, take initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor

single instance by an amendment of the AOI

(b) Extensions may not be made earlier than 5 years

prior to the original or subsequent expiry date(s)
EXCEPT if the SEC determines that there are
justifiable reasons for an earlier extension

LIABILITY OF PROMOTER
General rule: The promoter binds himself
PERSONALLY & assumes the responsibility of looking
to the proposed corporation for reimbursement.

MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENT (Sec. 12)
MINIMUM CAPITAL STOCK
Stock corporations incorporated under
the
Corporation Code shall not be required to have a
minimum authorized capital stock

Exceptions:
(1) Express or implied agreement to the contrary
(2) Novation, not merely adoption or ratification
of the contract

Exception: As provided for by special law and subject
to the provisions of Sec. 13

LIABILITY OF CORPORATION FOR PROMOTER’S
CONTRACTS
General rule: A corporation is NOT bound by the
contract. A
corporation, until organized, has no life and no legal
existence. It could not have had an agent (the
promoter) who could legally bind it.

SUBSCRIPTION REQUIREMENT
The amount of capital stock to be subscribed and
paid for the purposes of incorporation (Sec. 13):
(1) At the time of incorporation, at least 25%
of the
authorized capital stock stated in the AOI should
be subscribed;
(2) At least 25% of the said 25% above, must be
paid upon subscription;
(3) The balance to be payable on
(a) Dates fixed in the subscription contract or
(b) Upon call by the BOD in the absence of fixed
dates
(4) The paid-up capital can in no case be lower
than P5,000.00

Exceptions: A corporation may be bound by the
contract if it makes the contract its own by:
(1) Adoption or ratification of the ENTIRE
contract after incorporation.
(2) Acceptance of benefits under the contract
with knowledge of the terms thereof.
(3) Performance of its obligation under the contract
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber
to at least 1 share of the capital stock of the
corporation

ARTICLES OF INCORPORATION
NATURE AND FUNCTION OF ARTICLES
(1) Constitutes the charter of the corporation and
sets forth the rules and conditions upon which
the association or corporation is founded
(2) Defines the contractual relationships between the
State and the corporation, the stockholders and
the State, and the corporation and the
stockholders

CORPORATE NAME – LIMITATIONS ON USE
CORPORATE NAME (SEC. 18)
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or contrary to
existing laws
(3) After the submission of the AOI to the SEC.

CONTENTS
(1) Corporate Name
(2) Purpose Clause
(a) Must indicate the PRIMARY and SECONDARY

purposes if there is more than one purpose,
which should not contradict or change the
nature of the corporation (Sec. 14(2))
(b) Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules and
regulations (Sec. 17 (2)).
(c) Must not be for the purpose of practicing a
profession

CORPORATE TERM
General rule: A corporation shall exist for a
period not exceeding 50 years from the date of
incorporation
Exceptions:
(1) Sooner dissolved
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(3) Principal Office
(a) Must be within the Philippines
(b) AOI must specify both province or city or town

AMENDMENT
Amendment of the Articles of Incorporation
Any provision or matter stated in the
articles of incorporation may be amended
(1) By a majority vote of the board of directors or
trustees
(2) And the vote or written assent of:
(a) 2/3 of the outstanding capital stock, without
prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of
this Code,
(b) 2/3 of the members if it be a non-stock
corporation.
(Sec. 16)

where it is located

(c) A specific address is now required; Metro Manila

is no longer allowed

(4) Corporate Term
(5) Names, citizenship and residences of incorporators
(6) Number, names, citizenship and residences of

directors/ trustees
General rule: Not less than 5 but not more than
15 directors/ trustees
Exception: Non-stock corporations whose articles or
by- laws may provide for more than 15 trustees (Sec.
92)

Limitations
(1) Cannot effect amendment when it will
contravene any provision of requirement imposed
by the Code or by special laws
(2) The amendment must be for a legitimate purpose
(3) Must be approved by the directors/trustees
and the stockholders/members through the vote
requirement
(4) Appraisal Right
(5) Both the original and the amended articles
together must contain all the provisions required
by law to be set out in the articles.
(6) If the corporation is governed by a special
law the amended articles must be accompanied
by a favorable recommendation of the
appropriate government agency to the effect that
such amendment is in accordance with law
(Lopez, 2004)
(7) Will take effect only
(a) Upon their approval by the SEC by the
issuance of a certificate of amended articles
(b) Or from the date of filing with the SEC if not
acted upon within 6 months from the date of
filing for a cause not attributable to the
corporation

(7) If stock corporation
(a) authorized capital

stock in lawful money
of the
Philippines
(b) the number of shares into which the ACS is
divided
(c) if with par value shares, the par value of each
share (Sec.
14(8), Sec. 15(7)).
(d) names, citizenship and residences of
original subscribers
(e) amount subscribed and paid on each subscription
(f) fact that some or all shares are without par value
(8)
(a)
(b)
(c)

If non-stock corporation
amount of capital
names, nationalities & residences of contributors
amount contributed by each

(9) Amount

paid by each subscriber on their
subscription, which shall not be less than 25% of
subscribed capital and shall not be less than
P5,000 (Sec. 15 (8 & 9)

(10)

ame of treasurer elected by the subscribers (Sec. 15
(10)

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N

The following items are amendable under Sec. 16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or trustees
(5) Increase or decrease in authorized capital stock
(subject to Sec. 38)
NON-AMENABLE ITEMS
The following items state accomplished facts,
therefore, cannot be amended:
(1) The names, nationalities and residences
of the incorporators
(2) First set of directors or trustees
(3) Original stock subscriptions and paid-in capital
(4) Treasurer-in-trust
(5) Place and date of execution
(6) Witnesses (De Leon)

(11) Other matters
(a) Classes of shares, as well as preferences or

restrictions on any such class (Sec. 6).

(b) Denial or restriction of pre-emptive right (Sec.39).
(c) Prohibition against transfer of stock which would

reduce stock ownership to less than the required
minimum in the case of a nationalized business
or activity (Sec. 15(11)).

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for internal government of the corporation.

REGISTRATION AND ISSUANCE OF CERTIFICATE
OF INCORPORATION
REGISTRATION OF ARTICLES OF INCORPORATION
Documents to be filed with SEC: [BAT-LaNG]
(1) Articles of Incorporation
(2) Treasurer’s Affidavit certifying that 25% of the
total authorized capital stock has been
subscribed and at least 25% of such has been
fully paid in cash or property.
(3) Bank
certificate
covering
the
paid-up
capital.(Note:
Current SEC rules no longer require this if payment
for shares is made in cash)
(4) Letter authority authorizing the SEC to
examine the bank deposit and other corporate
books and records to determine the existence of
paid-up capital.
(5) Undertaking to change the corporate Name in
case there is another person or entity with
same or similar name that was previously
registered.
(6) Certificate of authority from proper Government
agency whenever appropriate like BSP for banks
and Insurance Commission for insurance
corporations.
ISSUANCE OF CERTIFICATE OF INCORPORATION
BY SEC
Effect: Commencement of corporate existence and
juridical personality (Sec. 19)
Revocation of certificate of incorporation: If
incorporators are found guilty of fraud in procuring the
same after due notice and hearing
GROUNDS FOR DISAPPROVING AOI (SEC. 17)
(F2P2)
(1) AOI does not SUBSTANTIALLY comply with
the form prescribed
(2) Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
(3) Treasurer’s Affidavit concerning the amount of
capital subscribed and or paid is false
(4) Required percentage of ownership of Filipino
citizens has not been complied with.
Remedy in case of rejection of AOI: Petition for review in
accordance with the Rules of Court
SEC shall give the incorporators reasonable time to
correct or modify objectionable portions of the articles
or amendment (Sec. 17).
ADOPTION OF BY-LAWS
NATURE AND FUNCTION OF BY LAWS
(1) Product
of
agreement
of
the
stockholders/members and establish the rules

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(2) “A rule or law of a corporation for its

government”

(3) Mere internal rules among stockholders and

cannot
affect or prejudice 3rd persons who deal with the
corporation unless they have knowledge of the same
(4) “According to its function, by-laws may be
defined as the rules and regulations or private
laws enacted by the corporation to regulate,
govern and control its own actions, affairs and
concerns and its stockholders or members and
directors and officers with relation thereto and
among themselves in their relation to it.”
REQUISITES OF VALID BY-LAWS
(1) Must be approved by the affirmative vote of the
stockholders representing MAJORITY of the
outstanding capital stock or majority of
members (If filed pre- incorporation: must be
approved and signed by all incorporators)
(2) Must be kept in the principal office of the
corporation, subject to inspection of stockholders
or members during office hours (Sec. 74)
BINDING EFFECTS
ONLY from date of issuance of SEC of certification
that by- laws are not inconsistent with the Code
Pending
approval,
they
stockholders or Corporation

CANNOT

bind

AMENDMENT OR REVISION
Effected by: Majority vote of the members of the
Board and majority vote of the owners of the OCS or
members, in a meeting duly called for the purpose.
Delegation to the BOD of the power to amend or
repeal by- laws: by vote of stockholders representing
2/3 of the OCS or 2/3 of the members

CORPORATE POWERS
GENERAL POWERS, THEORY OF GENERAL
CAPACITY
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell
stocks to subscribers and sell treasury stocks; for
non-stock corporation - admit members to the
corporation;
(7) Purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with
such real and personal property, pursuant to its
lawful business;
(8) Enter into merger or consolidation with
other corporations as provided in the Code;
(9) Make reasonable donations, including those
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for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for
purposes of partisan political activity;
(10) Establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers
and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its purposes

majority of the directors of the corporation
(countersigned by the chairman and the secretary
of the SH meeting), setting forth:
(a) That requirements of this section have been
complied with
(b) The amount of the increase or diminution of the
capital stock
(c) In case of increase,
(i) the amount of capital stock or number of shares
of no- par stock actually subscribed
(ii) names, nationalities and residences of the
persons subscribing
(iii) the amount of no-par stock subscribed by each
(iv) the amount paid by each on his subscription, or
the amount of capital stock or number of shares
of no-par stock allotted to each stockholder if
such increase is for the purpose of making
effective stock dividend
(d) any bonded indebtedness to be incurred,
created or increased
(e) the actual indebtedness of the corporation on the
day of the meeting
(f) the amount of stock represented at the meeting
(g) the vote authorizing the increase or diminution
of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness

Note: The Corporation has implied powers
which are deemed to exist because of the following
provisions:
(1) “Except such as are necessary or incidental
to the exercise of the powers so conferred” (Sec.
45)
(2) “Such powers as are essential or necessary to
carry out its purpose or purposes as stated in the
AOI”
SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY (Sec. 37-44) (BADD PIT MC)
(1) Power to Extend or Shorten Corporate Term
(2) Power to Increase or Decrease Capital Stock or
Incur,
Create, Increase Bonded Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in Another
Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management Contract

(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file in the

(a)

EXTEND OR SHORTEN THE CORPORATE TERM
(SEC. 37)
(1) Must be approved by majority vote of the
Board of
Directors/ Board of Trustees (BOD/BOT)
(2) Ratified at a meeting by 2/3 of SH
representing the outstanding capital stock/ 2/3 of
members of non-stock corporations

(b)

(i)

(3) Written notice of meeting (includes proposed

(ii)

action, time and place of meeting) shall be
addressed to each SH/member at his place of
residence and deposited to the addressee in the post
office, or served personally
(4) In case of extension of corporate term, appraisal
right may be exercised by the dissenting stockholder

(c)

office of the corporation and the other shall be filed
with the SEC, attached in the original articles of
incorporation.
From and after approval of the SEC of its
certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating
or increasing of any bonded indebtedness
authorized
SEC shall not accept for filing any certificate of
increase unless accompanied by the sworn
statement of the treasurer of the corporation
showing:
That at least 25% of such increased capital
stock have been subscribed and
that at least 25% of the amount subscribed has
been paid
or
that
there
has
been
transferred to the corporation property the
value is equivalent to 25% of the subscription
SEC shall not approve any decrease in the
capital stock if its effect shall prejudice the
rights of corporate creditors

(5) Bonds issued by a corporation shall be registered

INCREASE OR DECREASE CAPITAL STOCK (SEC.
38)
INCUR, CREATE OR INCREASE
INDEBTEDNESS (SEC. 38)
(1) Same requirements above from 1-3

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with the SEC

DENY PREEMPTIVE RIGHT (SEC. 39)
(1) All SH of a Stock Corporation have preemptive
right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings
(2) Except if such right is denied by the AOI or an

BONDED

(2) A certificate in duplicate must be signed by a
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amendment thereto

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(4) Stock dividends shall be withheld from the

(3) Pre-emptive right shall not extend to:
(a) shares to be issued in compliance with laws

requiring stock offerings or minimum stock
ownership by the public
(b) shares to be issued in good faith with the
approval of 2/3 of the stockholders representing
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt

(5)
(6)
(a)
(b)

SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS
ASSETS (SEC. 40)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH may exercise his appraisal right
(3) Deemed to cover substantially all the corporate
property and assets
(4) After authorization by the SH/members, the
BOD/BOT may abandon such sale, lease,
exchange, mortgage,
pledge or other disposition, subject to the rights of
third parties under any contract relating thereto, without
further action or approval by the SH/ members
(5) Corporation is not restricted in its power to dispose
assets:
(a) if the same is necessary in the usual and regular
course of business of the corporation or
(b) if the proceeds of the sale will be appropriated
for the conduct of its remaining business

(c)

delinquent stockholder until his unpaid subscription
is fully paid
Should be approved by 2/3 of SH
representing the outstanding capital stock at a
regular/special meeting called for that purpose
Stock corporations- prohibited from retaining
surplus profits in excess of 100% of their paid-in
capital stock, except:
When justified by definite corporate expansion
projects or programs approved by the BOD
When
the
corporation
is
prohibited
under
any loan agreement with any financial
institution or creditor from declaring dividends
without its consent, and such consent has not yet
been secured
When it can be clearly shown that such
retention
is necessary under special
circumstances obtaining in the corporation

ENTER INTO MANAGEMENT CONTRACTS (SEC. 44)
(1) Should be approved by the BOD and by SH
owning at least the majority of the outstanding
capital stock or at least a majority of the
members of both the managing and the
managed corporation at a meeting duly called
for that purpose
(2) Should be approved by the 2/3 of stockholders
owning outstanding capital stock/members of
the managed corporation when:
(a) A stockholder or stockholders representing the
same
interest of both the managing and managed
corporations own more than 1/3 of the total
outstanding capital stock entitled to vote of the
managing corporation; or
(b) A majority of the members of the BOD of the
managing corporation also constitute a majority
of the BOD of the managed corporation
(3) No management contract shall be entered into
for a period longer than 5 years for any one term
(4) 1-3 above applies to any contract whereby a
corporation undertakes to manage or operate all
or substantially all of the business of another
corporation, whether such are called service
contracts, operating agreements or otherwise
(5) Service contracts or operating agreements which
relate to exploration, development, exploitation
or utilization of natural resources may be
entered into for such periods as may be
provided in the pertinent laws and regulations

ACQUIRE ITS OWN SHARES (SEC. 41)
(1) For a legitimate corporate purpose/s, including
but not limited to the following:
(a) To eliminate fractional shares arising out of
stock dividends
(b) To collect or compromise an indebtedness
to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale;
and
(c) To pay dissenting or withdrawing stockholders
(2) Provided there are unrestricted retained earnings
(URE) in the corporate books to cover the shares
purchased or acquired
INVEST IN ANOTHER CORPORATION OR
BUSINESS (SEC. 42)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH shall have appraisal right
(3) Where
the
investment
is
reasonably
necessary
to accomplish the corporation’s
primary purpose, the approval of the SH/ members
is not necessary

ULTRA VIRES ACTS
Definition: Acts which a corporation is not empowered
to do or perform because they are not conferred by
its AOI or by the Corporation Code, or not necessary
or incidental to the exercise of the powers so
conferred (Sec. 45).

DECLARE DIVIDENDS (SEC. 43)
(1) Out of URE
(2) Payable in cash, in property, or in stock to all SH
on the basis of outstanding stock held by them
(3) Any cash dividend due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus costs and expenses

Applicability of ultra vires doctrine
If that act is one which is lawful in itself, and not
otherwise prohibited, is done for the purpose of
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serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not
in a remote and fanciful sense, it may fairly be
considered within the charter powers. The test to be
applied is whether the act in question is in direct and
immediate furtherance of the corporation’s business,
fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not.

BAR OPERATIONS COMMISSION

BY THE BOARD OF DIRECTORS
Board as repository of corporate powers
General rule (doctrine of centralized management):
The corporate powers of the corporation shall be
exercised, all business conducted and all property of
such corporation controlled and held by the board of
directors or trustees. (Sec. 23)
Requisites of a valid corporate act by the Board of
Directors
(1) The Board must act as a BODY in a meeting.
(2) There must be a VALIDLY constituted meeting.
(3) Their act must be supported by a MAJORITY
OF THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority of
ALL the members of the board)
(4) The act must be within the powers conferred
to the Board

Consequences of ultra vires Acts
(1) Executed contract – courts will not set aside or
interfere with such contracts;
(2) Executory contracts – no enforcement even at the
suit of either party (void and unenforceable);
(3) Partly executed and partly executory – principle
of “no unjust enrichment at expense of another”
shall apply;
(4) Executory contracts apparently authorized but
ultra vires
– the principle of estoppel shall apply.

BY THE OFFICERS
Who are corporate officers (POST) (Sec. 25)
(1) President – must be a director;
(2) Treasurer – may or may not be a director; as a
matter of sound corporate practice, must be a
resident and citizen of the Phil
(3) Secretary – need not be a director unless required
by the by-laws; must be a resident and citizen of
the Philippines; and
(4) Other officers as may be provided in the by-laws.

HOW (CORPORATE POWERS) EXERCISED
BY THE SHAREHOLDERS
Corporate acts requiring approval of stockholders or
members (voting and non-voting shares)
General rule: Vote necessary to approve a particular
corporate act as provided in this Code shall be
deemed to refer only to stocks with voting rights (Sec.
6)

Authority of Corporate Officers
A person dealing with a corporate officer is put on
inquiry as to the scope of the latter’s authority but an
innocent person cannot be prejudiced if he had the
right to presume under the circumstances the
authority of the acting officers.

Exceptions (Sec. 6): Voting and non-voting shares
shall be entitled to vote in the following cases:
(1) Amendment of AOI
(2) Adoption, Amendment and Repeal of By-Laws
(Sec. 48)
(3) Sale,
Lease,
Mortgage
or
Other
Disposition of Substantially all corporate assets
(Sec. 40)
(4) Incurring, Creating
or Increasing
Bonded
Indebtedness
(Sec. 38)
(5) Increase or Decrease of Capital Stock (Sec. 38)
(6) Merger and Consolidation(Sec. 76-80)
(7) Investment of funds in another corporation or
business or for any purpose other than the
primary purpose for which it was organized (Sec.
42)
(8) Dissolution of the Corporation (Sec. 118-121)

TRUST FUND DOCTRINE
The capital stock, properties and other assets of a
corporation are regarded as equity in trust for the
payment of corporate creditors. All funds received by
the corporation in payment of the shares of stock
shall be held in trust for the corporate creditors and
other stockholders of the corporation. Under such
doctrine no fund shall be used to buy back the issued
shares of stock except only in instances specifically
allowed by the Corporation Code.

BOARD OF DIRECTORS AND TRUSTEES
DOCTRINE OF CENTRALIZED MANAGEMENT

Corporate acts requiring approval of stockholders or
members (voting shares only)
(1) Declaration of Stock Dividends (Sec. 43)
(2) Management Contracts (Sec. 44)
(3) Fixing the Consideration of No-Par shares (Sec.
62)
(4) Fixing the Compensation of Directors (Sec. 30)

BOARD IS SEAT OF CORPORATE POWERS
General rule: Unless otherwise provided in this Code,
the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and
all property of such corporations controlled and held
by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no
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stock, from among the members of the corporation,
who shall hold office for one (1) year until their
successors are elected and qualified. (Sec. 23)

DISQUALIFICATIONS (SEC. 27)
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
(2) A violation of the Corporation Code, committed
within five years from the date of his election. This
includes violations of rules and regulations issued
by the SEC to implement the provisions of the
Corporation Code.

Limitations on powers of Board of Directors/Trustees
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws
(2) Certain acts of the corporation that require joint
action of the stockholders and board of directors:
(a) Removal of director (Sec. 28)
(b) Amendments of AOI (Sec. 16)
(c) Fundamental changes (Sec. 6)
(d) Declaration of stock dividends (Sec. 43)
(e) Entering into management contracts (Sec. 44)
(f) Fixing of consideration of non-par shares (Sec. 62)
(g) Fixing of compensation of directors (Sec. 30)
(3) Cannot

exercise powers
by the corporation.

not

BAR OPERATIONS COMMISSION

ELECTIONS
CUMULATIVE VOTING
Cumulative voting for one candidate
A stockholder is allowed to concentrate his votes
and give one candidate as many votes as the number
of directors to be elected multiplied by the number of
his shares shall equal.

possessed

Cumulative voting by distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the number
of directors to be elected and distribute the same
among as many candidates as he shall see fit.

BUSINESS JUDGMENT RULE
General rule: Directors cannot be held liable for
mistakes or errors in the exercise of their business
judgment if they acted in good faith, with due care
& prudence. Contracts intra vires entered into by the
board of directors are binding upon the corporation &
courts will not interfere.

STRAIGHT VOTING
Every stockholder may vote such number of shares
for as many persons as there are directors to be
elected.

Exception: If the contracts are so unconscionable &
oppressive as to amount to a wanton destruction of
the rights of the minority or if they violate their duties
under Sections 31 & 34.

QUORUM
There must be present, in person or by
representative authorized to act by written proxy, the
owners of majority of the OCS or majority of the
members entitled to vote in the meeting.

TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR
TRUSTEES
TENURE
Directors shall hold office for one (1) year until their
successors are elected and qualified (Sec. 23).

REMOVAL
General rule: Any Director or Trustee of a corporation
may be removed from office, with or without cause.
(Sec. 28)

Term: One (1) year
Tenure: The period within which the director actually
holds office, including the holdover period after the
end of his term.

Exception: Directors who have been elected by
minority stockholders exercising cumulative voting can
only be removed for cause. Removal without cause
may not be used to deprive minority stockholders or
members of the right of representation to which they
may be entitled under Section 24.

QUALIFICATIONS
(1) If STOCK, director must own at least 1 share of
the capital stock, which stock shall stand in his
own name (Sec. 23).Exception: Trustee in a voting
trust may be elected director/trustee.
(2) If NON-STOCK, trustee must be a member
(3) Majority of the
directors/trustees must be
residents of the Philippines.
(4) Natural person
(5) Of Legal Age
(6) Other qualifications as may be prescribed in the
by-laws of the corporation.

Other requisites:
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding capital
stock, or if the corporation be a non-stock
corporation, by a vote of 2/3 of the members
entitled to vote
(2) at a regular or special meeting after proper
notice is given

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FILLING OF VACANCIES

BAR OPERATIONS COMMISSION

Duty of diligence
Directors or trustees who (1) willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or (2) who are guilty of gross negligence
or (3) bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons. (Sec 31)

VACANCY (1) BY REMOVAL, (2) BY EXPIRATION OF
TERM, OR
(3) WHEN THE REMAINING DIRECTORS DO NOT
CONSTITUTE A QUORUM
Vacancy/ies must be filled by the stockholders in a
regular or special meeting called for that purpose.
A director or trustee elected to fill a vacancy in shall be
elected only for the unexpired
term of his
predecessor in office.

Duty of loyalty
Directors and trustees should not acquire any
personal or
pecuniary interest in conflict with their duty as such
directors or trustees, otherwise they shall be held
liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders
or members and other persons. (Sec. 31)

VACANCY BY REASON OF INCREASE IN THE
NUMBER OF THE DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
(1) in a regular or special meeting called for that
purpose; or
(2) in
the same meeting authorizing the
increase of directors or trustees if so stated in
the notice of the meeting.

SOLIDARY LIABILITY FOR DAMAGES
(1) Willfully and knowingly voting for and assenting
to patently unlawful acts of the corporation; (Sec.
31)
(2) Gross negligence or bad faith in directing the
affairs of the corporation; (Sec. 31)
(3) Acquiring any personal or pecuniary interest in
conflict of duty; (Sec. 31)
(4) Consenting to the issuance of watered stocks, or,
having knowledge thereof, failing to file
objections with secretary; (Sec. 65)
(5) Agreeing or stipulating in a contract to hold
himself liable with the corporation; or
(6) By virtue of a specific provision of law

VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at least a
majority of the remaining directors or trustees, if still
constituting a quorum.
A director or trustee elected to fill a vacancy in shall be
elected only for the unexpired
term of his
predecessor in office.
COMPENSATION (Sec. 30)
General rule: Directors are only entitled to
reasonable per diems. They are not entitled to
compensation as directors.

LIABILITY FOR WATERED STOCKS
Any director or officer of a corporation consenting to
the issuance of watered stocks or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary shall be solidarily liable with the
stockholder concerned to the corporation and its
creditors for the difference in value (Sec. 65).

Exception:
(1) When AOI, by-laws, or an advance contract
provides for compensation.
(2) Compensation other than per diems may also be
granted to directors by the vote of the
stockholders representing at least a majority of
the OCS at a regular or special stockholders’
meeting.

PERSONAL LIABILITIES
General rule: Members of the Board, who purport to
act in good faith for and in behalf of the corporation
within the lawful scope of their authority, are not
liable for the consequences of their acts. When the
acts are of such nature and done under those
circumstances, they are attributed to the corporation
alone and no personal liability is incurred. (Price v.
Innodata Phils., Inc., 2008)

The total yearly compensation of directors shall not
exceed 10% of the net income before income tax of
the corporation during the preceding year.
FIDUCIARY DUTIES AND LIABILITY RULES
Duty of obedience
The Directors or Trustees and Officers to be elected
shall
perform the duties enjoined on them by law and by
the by- laws of the corporation (Sec. 25).

SPECIAL FACTS DOCTRINE
General rule: (Majority view) Directors only owe its
duty to the corporation. They owe no fiduciary duty to

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stockholders but they may deal with each other at
fair and reasonable terms, as if they were unrelated.
No duty to disclose facts known to the director or
officer.

BAR OPERATIONS COMMISSION

Ratification: In case of absence of the first two
conditions above, contract may be ratified if:
(1) Stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the
members in a meeting called for the purpose
voted to ratify the contract.
(2) Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting.
(3) Contract is fair and reasonable under the
circumstances

Exception: Special Facts Doctrine: Conceding the
absence of a fiduciary relationship in the ordinary
case, courts nevertheless hold that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises and
concealment is fraud. (Strong v. Rapide, 1909)

BETWEEN CORPORATIONS WITH INTERLOCKING
DIRECTORS
If the interests of the interlocking director in the
corporations are both substantial (stockholdings
exceed 20% of outstanding capital stock).

RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against criminally
because it cannot commit a crime in which personal
violence or malicious intent is required.
Criminal action is limited to the corporate agents guilty
of an act amounting to a crime and never against the
corporation itself

General rule: A contract between two or more
corporations having interlocking directors shall not be
invalidated on that ground alone. (Sec. 32)

Since the BOD is the repository of corporate powers
and acts as the agent of the corporation, the
directors may be held criminally liable.

Exception: If contract is fraudulent or not fair
and reasonable under the circumstances
If the interest of the interlocking director in one of the
corporations is nominal (stockholdings 20% or less)
while substantial in the other, the contract shall be
VALID, if the following conditions are met:

INSIDE INFORMATION
The fiduciary position of insiders, directors, and
officers prohibits them from using confidential
information relating to the business of the
corporation to benefit themselves or any competitor
corporation in which they may have a mere
substantial interest.

(1) The presence of such director or trustee in the

board meeting in which the contract was
approved was NOT necessary to constitute a
quorum for such meeting
(2) That the vote of such director or trustee was
not necessary for the approval of the contract
(3) That the contract is fair and reasonable
under the circumstances.

It is inside information if it is not generally available to
others and is acquired because of the close
relationship of the director or officer of the corporation
CONTRACTS

Where (1) and (2) are absent, the contract can be
ratified by the vote of the stockholders representing at
least 2/3 of the outstanding capital stock or at least
2/3 of the members in a meeting called for the
purpose voted to ratify the contract, provided that:
(a) Full disclosure of the adverse interest of
the directors/trustees involved is made on such
meeting;
(b) The contract is fair and reasonable under
the circumstances.

BY SELF-DEALING DIRECTORS WITH THE
CORPORATION
General rule: A contract of the corporation with one or
more of its directors or trustees is VOIDABLE, at the
option of such corporation. (Sec. 32)
Exception: Such contract is VALID if all of the
following conditions are present:
(1) That the presence of such director or trustee
in the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
(2) That the vote of such director or trustee was
not necessary for the approval of the contract
(3) That the contract is fair and reasonable
under the circumstances; and
(4) That in case of an officer, the contract has
been previously authorized by the board of
directors

MANAGEMENT CONTRACTS (SEC. 44)
See: Corporate Powers (2)(h) above
EXECUTIVE COMMITTEE
CREATION
The by-laws of a corporation may create an
executive committee, composed of not less than

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three members of the board, to be appointed by the
board.

BAR OPERATIONS COMMISSION

RIGHTS OF STOCKHOLDER AND MEMBERS
(1) Direct or indirect participation in management
(Sec. 6)
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock certificate for fully paid
shares
(d) Proportionate participation in the distribution of
assets
in liquidation (Sec. 122)
(e) Right to transfer of stocks in corporate books (Sec.
63)
(f) Pre-emptive right (Sec. 39)

Said committee may act, by majority vote of all its
members, on such specific matters within the
competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board.
MEETINGS
REGULAR OR SPECIAL
Who may attend? The members of the Board
themselves; directors in Board meetings cannot be
represented or voted by proxies.
When? (Sec.53)
(1) Regular meetings of directors or trustees shall be
held
monthly, unless the by-laws provide otherwise.
(2) Special meetings of the board of directors or
trustees may be held at any time upon the call of
the president
or as provided in the by-laws.

(5) Right to inspect books and records (Sec. 74)
(6) Right to be furnished with the most recent

financial statements/reports (Sec. 75)

(7) Right to recover stocks unlawfully sold for

delinquent
payment of subscription (Sec. 69)
(8) Right to file individual suit, representative
suit and
derivative suits

Where? (Sec. 53)
Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise.

DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are presumed
equal with the same privileges and liabilities, provided
that the Articles of Incorporation is silent on such
differences.

Notice
Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every
director or trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the bylaws.

PROXY
Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members (Sec.
58). However, the right of members to vote by proxy
may be denied under the articles of incorporation or
by-laws of a non-stock corporation (Sec. 89)

WHO PRESIDES
The president presides, unless the by-laws provide
otherwise.

Requisites for a valid and enforceable proxy
(1) It must be in writing
(2) Signed by the stockholder or member of record;
and
(3) Filed with the corporation before the scheduled
meeting with the Corporate Secretary

QUORUM
General rule: Majority of the number of directors or
trustees as fixed in the articles of incorporation.(Sec.
25)
Exceptions:
(1) Unless the articles of incorporation or the
by-laws provide for a greater majority, or
(2) In case of election of officers where a vote of a
majority of all the members of the board is needed.

VOTING TRUST
An arrangement created by one or more
stockholders for the purpose of conferring upon a
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding
five (5) years at any time (Sec. 59).

RULE ON ABSTENTION
A vote of abstention is considered to be a vote in itself.
Abstentions will not be counted towards the
affirmative and such refusal to vote does not indicate
acquiescence in the action of those who vote.

A voting trust agreement shall be ineffective and
unreasonable unless:
(1) It is in writing and notarized;
(2) Specify the terms and conditions thereof; and
(3) A certified copy of such agreement shall be filed

Stockholders and Members

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with the corporation and with the SEC
CASES WHEN
REQUIRED

STOCKHOLDERS’

BAR OPERATIONS COMMISSION

as shown in the books of the corporation multiplied
by the whole number of directors to be elected.
ACTION

IS

By a majority vote
(a) Power to enter into management contracts (Sec.
44)
(b) Amendments to by-laws (Sec. 48)
(c) Revocation of delegation to the BOD of the
power to amend or repeal or adopt by-laws (Sec.
48)
(d) Calling a meeting to remove directors (Sec. 28)
(e) Granting compensation other than per diems to
directors (Sec. 30)
(f) Consideration for no-par shares
By a two-thirds vote
(a) Amendment of Articles of Incorporation (Sec. 16)
(b) Amendment of AOI of close corporations (Sec 103)
(c) Delegating the power to amend or repeal bylaws or adopt new by-laws (Sec. 48)
(d) Extending/shortening corporate term (Sec. 37)
(e) Increasing/decreasing capital stock (Sec. 38)
(f) Incurring,
creating,
increasing
bonded
indebtedness(Sec.
38)
(g) Issuance of shares not subject to pre-emptive right
(Sec.
39)
(h) Sale/disposition of all or substantially all of
corporate assets(Sec. 40)
(i) Investment of funds in another business (Sec. 42)
(j) Dividend declaration (Sec. 43)
(k) Power to enter into management contracts (Sec. 44)
(l) Removal of directors or trustees (Sec. 28)
(m) Ratifying contracts with respect to dealings
with directors/ trustees (Sec. 32)
(n) Ratifying acts of disloyalty of a director (Sec. 34)
(o) Stockholders’
approval of the plan of
merger or consolidation (Sec. 77)
(p) Distribution of assets in non-stock corporations
(Sec. 96)
(q) Incorporation of a religious society (Sec. 116)
(r) Voluntary dissolution of a corporation (Sec. 118-119)
By cumulative voting
Election of Directors or Trustees (Sec. 24) - A stockholder
may vote such number of shares for as many
persons as there are directors to be elected or he
may cumulate said shares and give one candidate as
many votes as the number of directors to be elected
multiplied by the number of his shares shall equal, or
he may distribute them on the same principle among
as many candidates as he shall see fit:
Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him

PROPRIETARY RIGHTS
RIGHT TO DIVIDENDS
General rule: The right to dividends vests upon
lawful declaration by the BOD. From that time,
dividends become a debt owing to the SH. No
revocation can be made.
Exceptions:
(1) Dividends
are
revocable
if
NOT
yet
announced
or communicated to the
stockholders.
(2) Stock dividends, even if already declared,
may be revoked prior to actual issuance since
these are not distributions but merely
representations of changes in the capital
structure.
RIGHT OF APPRAISAL
Right to withdraw from the corporation and demand
payment of the fair value of the shares after dissenting
from certain corporate acts involving fundamental
changes in corporate structure (Sec. 81).
Requirements for exercise of appraisal right (Secs. 82,
86)
(1) Stockholder must have voted against the
corporate act.
(2) Stockholder must make a written demand on the
corporation within 30 days after the vote was
taken for payment of the fair value of his shares
on the said date.
(3) Stockholder must submit the certificates to the

corporation for notation within ten (10) days after
demand for payment. Otherwise, right to
appraisal may be terminated at the option of
corporation.
Effect of demand (Sec. 83)
ALL rights accruing to such shares, including
voting and dividend rights, shall be suspended.
EXCEPT the right of such stockholder to receive
payment of the fair value thereof
RIGHT TO INSPECT
As the beneficial owners of the business, the
stockholders have the right to know the financial
condition and management of corporate affairs.
Records/books to be kept (Sec. 74)
(1) Books that record all business transactions of the
corporation which shall include contract, memoranda,
journals, ledgers, etc;
(2) Minute
book
for
meetings
of
the
stockholders/members;
(3) Minute book for meetings of the board/trustees;
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(4) Stock and transfer book

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the corporation.

Requirements for the exercise of the right of inspection
(Sec. 74)
(1) It must be exercised at reasonable hours on
business days and in the place where the
corporation keeps all its records (i.e., principal
office).
(2) The
stockholder
has
not
improperly
used any information he secured through
any previous examination.
(3) Demand is made in good faith or for a
legitimate purpose.
If the corporation or its
officers contest such purpose or contend that
there is evil motive behind the inspection, the
burden of proof is with the corporation or such
officer to show the same.

RIGHT OF FIRST REFUSAL
The right of first refusal provides that a stockholder
who may wish to sell or assign his shares must first
offer the shares to the corporation or to the other
existing stockholders under terms and conditions which
are reasonable; and that only when the corporation or
the other stockholders do not or fail to exercise their
option, is the offering stockholder at liberty to dispose
of his shares to third parties.
REMEDIAL RIGHTS
INDIVIDUAL SUIT
A suit brought by the shareholder in his own name
against the corporation when a wrong is directly
inflicted against him.

PRE-EMPTIVE RIGHT
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a proportionate
part of shares subsequently issued by the corporation
before the same can be disposed of in favor of others;
this right includes all issues and disposition of shares
of any class. It is a common law right and may be
exercised by stockholders even without legal
provision.

REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly situated
when a wrong is committed against a group of
stockholders.
DERIVATIVE SUIT
It is a suit brought by one or more
stockholders/members in the name and on behalf of
the corporation to redress wrongs committed against
it, or protect/vindicate corporate rights whenever the
officials of the corporation refuse to sue, or the ones
to be sued, or has control of the corporation.
Jurisdiction over derivative suits lies with the RTC

Limitations to exercise of pre-emptive right (Sec. 39)
(1) Such pre-emptive right shall NOT extend to
shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
(2) It shall also NOT extend to shares to be issued
in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt
(3) It shall not take effect if denied in the AOI
or an amendment thereto.
(4) If one shareholder does not want to exercise
his pre-emptive right, the other shareholders are
not entitled to purchase the corresponding
shares of the shareholder who declined. But if
nobody purchased the same and later on the
board re-issued the shares, the pre-emptive right
applies.

Requisites of derivative actions
(1) That the person instituting the action be a
stockholder or member at the time the acts or
transactions subject
of the action occurred and the time the action was
filed;
(2) That the stockholder or member exerted all
reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all
remedies available under the Articles
of
Incorporation,
by-laws,
laws
or rules
governing the corporation or partnership to
obtain the relief he desires
(3) That there is no appraisal right available for the
act(s) complained of; and
(4) That the suit is not a nuisance or harassment
suit. (Rule 8, Interim Rules of Procedure for IntraCorporate Controversies)

RIGHT TO VOTE
(1) Non-voting shares are not entitled to vote
except as provided for in the last paragraph of
Sec. 6.
(2) Preferred or redeemable shares may be deprived
of the right to vote
(3) Fractional shares of stock cannot be voted
(4) Treasury shares have no voting rights as long
as they
remain in the treasury.
(5) No delinquent stock shall be voted (Sec. 71)
(6) A transferee of stock cannot vote if his transfer is
not registered in the stock and transfer book of

OBLIGATIONS OF A STOCKHOLDER
LIABILITY TO THE CORPORATION FOR UNPAID
SUBSCRIPTION
A subscription contract is unconditional (i.e.,
obligation to
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pay is not be subject to any contingency) and
indivisible (as
to the amount and transferability). Hence, if the
subscriber paid 20% of his subscription, he is not
entitled to the issuance of certificates corresponding
to 20% of the shares.
LIABILITY TO THE CORPORATION FOR INTEREST
ON UNPAID SUBSCRIPTION IF SO REQUIRED BY
THE BY-LAWS (SEC. 66)
General rule: Subscribers for stock are NOT liable
to pay
interest on his unpaid subscription
Exception: If so required in the by-laws at the rate
fixed in the by-laws. If no rate is fixed in the by-laws,
such rate shall be deemed to be the legal rate (Sec.
66)
LIABILITY FOR WATERED STOCKS (SEC. 65)
These are shares issued as fully paid when in truth no
consideration is paid, or the consideration received is
known to be less than the par value or issued value
of the shares. (Sec. 65)
These include the following:
(1) Issued without consideration (bonus share)
(2) Issued as fully paid when the corporation has
received less sum of money than its par or issued
value (discounted share)
(3) Issued for consideration other than actual cash

(i.e., property or services), the fair valuation of
which is less than its par or issued value
(4) Issue stock dividend when there are no
sufficient
retained earnings or surplus to justify it.
LIABILITY FOR DIVIDENDS UNLAWFULLY PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence,
as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee
for the corporation and must account for the profits
which otherwise would have accrued to the
corporation (Sec. 31).
LIABILITY FOR ASSUMING TO ACT AS A
CORPORATION KNOWING IT TO BE WITHOUT
AUTHORITY
All persons who assume to act as a corporation
knowing it
to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages
incurred or arising as a result thereof.

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MEETINGS
General rule: Stockholders’ or members’ approval is
expressed in a meeting duly called and held
for the
purpose.
Exception: In case of amendment of AOI, approval
may be expressed by referendum or written assent of
the stockholders or members (Sec. 16)
Who May Attend and Vote?
(1) Stockholders, either in person or by proxy
(2) Pledgors or mortgagors (Sec. 55)
(3) Pledgee or mortgagee, IF expressly given such
right by the pledgor or mortgagor in writing which
is recorded on the corporate books(Sec. 55)
(4) Executors, administrators, receivers, and other
legal representatives duly appointed by the
court, without need of any written proxy(Sec. 55)
(5) ALL joint owners of stocks, or any one of them
with the consent of ALL the co-owners, unless
there is a written proxy, signed by all the coowners(Sec. 56)
(6) Any one of the joint owners of shares owned
in an "and/or" capacity or a proxy thereof(Sec.
56)
REGULAR OR SPECIAL
When? (Sec. 50)
Regular meetings of stockholders or members shall
be held annually on a date fixed in the by-laws, or if
not so fixed, on any date in April of every year as
determined by the board of directors or trustees.
Where?
(1) Stock: City or municipality where the principal
office of the corporation is located, or, if
practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality. (Sec. 51)
(2) Non-stock: Any place even outside the place
where the principal office is located, within the
Philippines (Sec. 93)
Notice
(1) Regular Meeting—written notice sent to all
SH or
members at least 2 weeks prior to the meeting, unless
a different period is required by the by-laws
(2) Special Meeting—written notice sent at least 1
week prior
to the meeting, unless otherwise provided in the
by- laws.
Subject to waiver, expressly or impliedly (i.e.,
attendance despite no notice)
Effect of Failure to Give Notice
Failure to give notice would render a meeting
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VOIDABLE atthe instance of an absent stockholder,
who was not notified of the meeting (Board v. Tan,
1959).
WHO CALLS THE MEETINGS
The president, unless the
otherwise.(Sec. 54)

by-laws

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(1) For a period of at least 6 months from the

date of
subscription, UNLESS (a) all of the other subscribers
consent to the revocation, or (b) the incorporation
fails to materialize within six (6) months or within a
longer period as may be stipulated in the contract of
subscription; or
(2) After the submission of the AOI to the SEC.

provide

Any petitioning stockholder or member upon order
of the SEC when there is no person authorized to
call a meeting. Such petitioning stockholder or
member shall preside thereat until at least a majority
of the stockholders or members present have chosen
one of them as presiding officer. (Sec. 50)

Post-incorporation subscription
It is entered into after incorporation.
CONSIDERATION FOR STOCKS
FORMS OF CONSIDERATION (SEC. 62)
(1) Actual cash
(2) Property, tangible or intangible, actually received
by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock
issued.
(a) Property
should
NOT be
encumbered.
Otherwise, it
would impair the consideration
(b) Valuation is initially determined by the
incorporators or the board of directors, subject to
approval by the SEC.

QUORUM
General rule: Stockholders representing majority of the
OCS or majority of the members
Exception: The Code or the by-laws provide otherwise
MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of
stockholders or members, or of the board of directors
or trustees shall be kept and preserved at the
principal office of every corporation.
Contents
(1) time and place of holding the meeting;
(2) how the meeting was authorized;
(3) the notice given;
(4) whether the meeting was regular or special, if
special its object;
(5) those present and absent; and
(6) every act done or ordered done at the meeting.

(3) Labor performed for or services actually rendered

to the corporation;

(4) Amounts transferred from unrestricted retained

earnings to stated capital (declaration of stock
dividends); and
(5) Outstanding shares exchanged for stocks in the
event of
reclassification or conversion;
(6) Previously
incurred indebtedness of the
corporation;

Upon demand by any director/trustee or SH/member,
the following shall also be noted in the minutes
(1) the time when any director, trustee, stockholder or
member entered or left the meeting;
(2) the yeas and nays on any motion or proposition;
(3) the
protest of any director/trustee or
stockholder/member on any action or proposed
action.

LIMITATIONS ON CONSIDERATION
Stocks shall NOT be issued:
(1) for a consideration less than the par or
issued price thereof
(2) in exchange for promissory notes or future service

CAPITAL STRUCTURE

SHARES OF STOCK

SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be
formed shall be deemed a subscription contract.(Sec.
60).

NATURE OF STOCK
Shares of stock are units into which the capital stock is
divided. A share of stock represents interest of the
holder thereof to participate in the management of
the corporation, to share proportionally in the profits
of the business and, upon liquidation, to obtain an
aliquot part of corporate assets after all corporate
debts have been paid. (Campos)

TYPES OF SUBSCRIPTION CONTRACTS
Pre-incorporation subscription (Sec. 61)
It is a subscription for shares of stock of a corporation
still to be formed
When
pre-incorporation
IRREVOCABLE:

subscription

is

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SUBSCRIPTION AGREEMENTS (SEE ABOVE)

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(9) Non-voting shares

CONSIDERATION FOR SHARES OF STOCK (SEE
ABOVE)

General rule: No share may be deprived of voting rights
(Sec. 6)

WATERED STOCK
Definition
These are shares issued as fully paid when in
truth no consideration is paid in any form, or the
consideration received is known to be less than the
par value or issued value of the shares. (Sec. 65)

Exceptions:
(1) Preferred or
(2) Redeemable shares,
(3) Provided by the Code (e.g., Treasury shares)
There shall always be a class/series of shares which
have a COMPLETE VOTING RIGHTS (Sec. 6)

Liability of Directors for Watered Stocks
Any director or officer of a corporation consenting to
the issuance of stocks or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary
shall be solidarily liable with the stockholder
concerned to the corporation and its creditors for the
difference in value (Sec. 65).

Common shares
The most common type of shares, which enjoy no
preference but the owners thereof are entitled to
management of the corporation and to equal prorata division of profits after preference.

Trust Fund Doctrine for Liability for Watered Stocks
Where the corporation issues watered stock and
thereby assumes an ostensible capitalization in
excess of its real assets, the transaction necessarily
involves the misleading of subsequent creditors, and
whether done with that purpose actually in mind or
not, is at least a constructive fraud upon creditors.
Hence, it is held that recovery may be had by a
creditor in such case, even though the corporation
itself has no cause of action against the stockholders.
Some of the earlier decisions put the right of
recovery in such a case upon the so-called “trust fund
doctrine.” In any view of the matter, however, the
creditors’ right of action to compel the making good
of the representation as to the corporation’s capital
is based on fraud, and the trust fund doctrine is only
another way of expressing the same underlying idea.
(De Leon)

Preferred shares
Stocks which are given preference by the
issuing corporation in dividends and the distribution of
assets of the corporation in case of liquidation or such
other preferences as may be stated in the AOI which
do not violate the Corporation Code.

SITUS OF THE SHARES OF STOCK
It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile
of the owner of a certificate but the domicile of the
corporation which is decisive.

Par value shares
These are shares with a stated value set out in the
AOI. This remains the same regardless of the
profitability of the corporation. This gives rise to
financial stability and is the reason why banks, trust
corporations, insurance companies and building and
loan associations must always be organized with par
value shares.

Limitations:
(1) Preferred shares can only be issued with par
value.
(2) Preferred shares must be stated in the
Articles of
Incorporation and in the certificate of stock.
(3) The BOD may fix the terms and conditions only
when so authorized by the AOI and such terms
and conditions
shall be effective upon filing a certificate thereof
with the SEC.

CLASSES OF SHARES OF STOCK
Shares of stock of stock corporations may be
divided into classes or series of shares or both. Each
class or series of shares may have rights, privileges
or restrictions, as stated in the AOI

No-par value shares
These are shares without a stated value.
Founder’s shares (Sec. 7)
These are shares, classified as such in the AOI,
which are given certain rights and privileges not
enjoyed by the owners of other stocks.

Classification of shares:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares

Redeemable shares (Sec. 8)
These are shares which permit the issuing corporation
to redeem or purchase its shares.

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Treasury shares (Sec. 9)
Shares which have been issued and fully paid for, but
subsequently re-acquired by the issuing corporation
by purchase, redemption, donation or through some
other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the BOD.

BAR OPERATIONS COMMISSION

SALE OF DELINQUENT SHARES (SEC. 68)
Delinquent Shares - These are shares for which the
corresponding subscription or balance remains unpaid
after a grace period of 30 days from the date
specified in the contract of subscription or from the
date stated in the call made by the BOD.
Effect of delinquency (Sec. 71)
No delinquent stock shall be voted for or be entitled
to vote or to representation at any stockholders’
meeting. The holder thereof shall NOT be entitled to
any of the rights of a stockholder except the right to
dividends. But the dividends it will receive will be
subject to Sec. 43, that is, cash dividends shall first
be applied to the unpaid balance on the subscription
plus costs and expenses, and stock dividends shall be
withheld until the unpaid subscription is fully paid.

Convertible shares
A type of preferred stock that the holder can exchange
for a predetermined number of common shares at
a specified time
Non-voting shares (Sec. 6)
General rule: Non-Voting Shares are not entitled to
vote.
Exceptions:
(1) Amendment of the AOI
(2) Adoption and amendment of by-laws
(3) Sale, lease, exchange, other disposition of
all or substantially all of the corporate property
(4) Incurring, creating or increasing bonded
indebtedness
(5) Increase or decrease of capital stock
(6) Merger and consolidation
(7) Investment of corporate funds in another
corporation or business
(8) Dissolution of the corporation

Call by resolution of the Board of Directors (Sec. 68)
The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state the
amount due on each subscription plus all accrued
interest, and the date, time and place of the sale
which shall not be less than 30 days nor more than
60 days from the date the stocks became delinquent,
which is 30 days after the date specified in the
contract of subscription or on the date stated in the
call.
Notice of sale
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the resolution shall
be sent to every delinquent stockholder either
personally or by registered mail
(2) Notice of sale shall furthermore be published
once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province
or city where the principal office of the
corporation is located.

PAYMENT OF BALANCE OF SUBSCRIPTION
CALL BY BOARD OF DIRECTORS
The board of directors of any stock corporation may
at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof,
in either case with accrued interest, if any, as it may
deem necessary.
There are two (2) instances when call is not
necessary to make the subscriber liable for payment
of the unpaid subscription:
(1) When, under the terms of the subscription
contract, subscription is payable, not upon call,
but immediately, or on a specified day, or
when it is payable in installments at specified
times; and
(2) If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
due
and demandable, regardless of any
stipulation to the contrary in the subscription
agreement (Villanueva)

Auction Sale and the Highest Bidder

NOTICE REQUIREMENT
Where call is necessary, notice must be given to the
stockholder concerned. A call without notice to the
subscriber is practically no call at all.

Notes:
(1) Requirements on notice and publication are
mandatory.
Lacking such requirements, the stockholder may
question the sale as provided under Sec. 69.
(2) Public auction – the highest bidder is one who is

Procedure for delinquency sale (Sec. 68)
(1) Call for payment made by the BOD.
(2) Notice of call served on each stockholder.
(3) Notice of delinquency issued by the BOD upon
failure of the stockholder to pay within 30 days
from date specified.
(4) Service of notice of delinquency on the nonpaying subscriber, PLUS publication in a
newspaper of general circulation in the province
or city where the principal office of the corporation
is located, once a week for two (2) consecutive
weeks.

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willing to pay the balance of the subscription for
the least number of shares. If there are no
bidders, the corporation must bid for the whole
number of shares regardless of how much the
SH has paid. Such stocks will pertain to the
corporation as fully paid treasury stocks.

BAR OPERATIONS COMMISSION

delinquent shares), if any is due, has been paid
Payment Pro-Rata
The entire subscription must be paid first
before the certificates of stock can be issued. Partial
payments are to be applied pro rata to each share of
stock subscribed.

CERTIFICATE OF STOCK

LOST OR DESTROYED CERTIFICATES
Procedure for re-issuance in case of loss, stolen or
destroyed certificates:
(1) Registered owner to file an affidavit of loss
with the corporation.
(2) Publication of notice of loss in a newspaper of
general circulation published in the place where
the corporation
has its principal office, once a week for 3 consecutive
weeks at the expense of the owner of the certificate
of stock
(3) Cancellation of the certificate in the books
of
the corporation and issuance of new
certificates, after the expiration of 1 year from the
date of the last publication and there is no
contest. The right to make such contest shall be
barred after the expiration of the one-year
period.
(4) Issuance of new certificates before 1 year period
if the registered owner files a bond and there is
no pending contest regarding the ownership of
said certificates.

NATURE OF THE CERTIFICATE
A certificate of stock is an instrument formally issued
by the corporation with the intention that the same
constitute the best evidence of the rights and status
of a SH (not a condition precedent to the acquisition
of such rights)
UNCERTIFICATED SHARES
Uncertificated Shares/Securities: Security evidenced by
electronic or similar records (Sec. 3.14, Securities
Regulation Code)
Transfers of uncertificated securities, how made
(1) Valid as between parties – validly made
and consummated by appropriate book-entries
in the securities intermediaries, or in the stock and
transfer book held by the corporation or the stock
transfer agent. A transfer made pursuant to the
foregoing has the effect of delivery of a security in
bearer form or duly indorsed in blank
representing the amount of security or right
transferred,
including
the
unrestricted
negotiability of that security by reason of such
delivery.
(2) Valid as to corporation – when the transfer is
recorded in the books of the corporation so as to
show the names of the parties to the transfer and
the number of shares transferred

STOCK AND TRANSFER BOOK
CONTENTS
(1) a record of all stocks in the names of the
stockholders alphabetically arranged;
(2) the installments paid and unpaid on all stock for
which subscription has been made, and the date
of payment of any installment;
(3) a statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to
whom made; and
(4) such other entries as the by-laws may prescribe.

NEGOTIABILITY
Theory of quasi-negotiability
A stock certificate is regarded as quasi-negotiable
only in the sense that it may be transferred by
endorsement, coupled with delivery.

WHO MAY MAKE VALID ENTRIES
(1) a SEC-licensed stock transfer agent; or
(2) the
Corporate Secretary of the stock
corporation provided all rules and regulations
imposed on stock transfer agents shall be
applicable, except payment of license fee.

Requirements for valid transfer of stocks
For a valid transfer of stocks, the requirements
are as follows:
(1) There must be delivery of the stock certificate;
(2) The certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally
authorized to make the transfer; and
(3) To be valid against third parties, the transfer
must be recorded in the books of the corporation.

DISPOSITION AND ENCUMBRANCE OF SHARES
ALLOWABLE RESTRICTIONS ON THE SALE OF
SHARES
General rule: Shares of stock so issued are personal
property and may be transferred (Sec. 63). (FREE
TRANSFERABILITY OF SHARES)

ISSUANCE
Full payment
General rule: No certificate of stock shall be issued to a
subscriber until the full amount of his subscription
together with interest and expenses (in case of

Exception: In CLOSE corporations, restrictions on the
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right to transfer shares may be provided in the AOI,
by-laws and certificates

BAR OPERATIONS COMMISSION

reasonable, valid and binding.

DISSOLUTION AND LIQUIDATION

SALE OF PARTIALLY PAID SHARES
Under Section 63 of the Corporation Code, no shares
of stock against which the corporation holds any
unpaid claim shall be transferable in the books of
the corporation. Therefore, a corporation may refuse
to acknowledge and register a sale or assignment of
shares which are not fully paid, and may continue to
hold the original subscriber liable on the payment of
the subscription.

Dissolution of a corporation is the extinguishment of
its franchise and the termination of its corporate
existence or business purpose.
MODES OF DISSOLUTION
VOLUNTARY
Where no creditors are affected (Sec. 118)
Notice of the meeting should be given to the
stockholders or members by personal delivery or
registered mail at least 30 days prior to the meeting.

SALE OF A PORTION OF SHARES NOT FULLY PAID
The SEC has opined on several occasions that a
stockholder who has not paid the full amount of his
subscription cannot transfer part of his subscription in
view of the indivisible nature of a subscription contract.

The notice of meeting should also be published for
3 consecutive weeks in a newspaper published in
the
place where the principal office of said
corporation is located. If no newspaper is published in
such place, then in a newspaper of general circulation
in the Philippines.

SALE OF ALL OF SHARES NOT FULLY PAID
On the other hand, the SEC has opined that the entire
subscription, although not yet fully paid, may be
transferred to a single transferee, who as a result of
the transfer must assume the unpaid balance. It is
necessary, however, to secure the consent of the
corporation since the transfer of subscription rights
and obligations contemplates a novation of contract
which under Article 1293 of the Civil Code cannot be
made without the consent if the creditor. (Villanueva)

The resolution to dissolve must be approved by the
majority of the directors/trustees and approved by
the stockholders representing at least 2/3s of the OCS
or 2/3 of members.
Non-voting shares are entitled to vote in this matter
(Sec. 6. Par 6(8))

SALE OF FULLY PAID SHARES
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-infact or other person legally authorized to make the
transfer. No transfer however shall be valid except as
between the parties until the transfer is recorded in
the books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or certificates
and the number of shares transferred (Sec. 63)

A copy of the resolution shall be certified by the
majority of the directors or trustees and countersigned
by the secretary.
The signed and countersigned copy will be filed
with the SEC and the latter will issue the certificate of
dissolution.
Where creditors are affected
A petition shall be signed by a majority of its board of
directors or trustees or other officers having
management of its affairs.

REQUISITES OF A VALID TRANSFER
Same as requirements for valid transfer of stocks

The petition must be verified by its president, or
secretary or one of its director or trustees.
Approval of the stockholders representing at least
2/3 of the OCS or 2/3 of members in a meeting
called for that purpose.

INVOLUNTARY DEALINGS WITH SHARES
If the restriction on the right to pledge or mortgage
shares of stock absolutely prohibits the stockholders
from pledging or mortgaging their shares without the
consent of the board of directors, it would be violative
of the statutory right of the stockholders to encumber
shares of stock as allowed in Section 55. However,
when the restriction merely allows the corporation or
existing stockholders to accept the offer within the
option period, and thereafter, if no one accepts the
offer, the stockholder is free to pledge or mortgage
his shares in favor of any third party, such provision is

Filing of a petition with the SEC signed by majority of
directors or trustees or other officers having the
management of its affairs verified by the President
or Secretary or Director. Claims and demands must
be stated in the petition.
If the petition is sufficient in form and substance, the
SEC shall issue an order fixing a hearing date for
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objections.

BAR OPERATIONS COMMISSION

A corporation may be dissolved by the SEC, upon a
verified
complaint and after proper notice and hearing,
on the following grounds:
(1) Fraud in procuring its certificate of registration
(2) Serious misrepresentation as to what the
corporation
can or is doing to the great prejudice of or damage
to the general public
(3) Refusal to comply or defiance of any lawful order
of the Commission restraining commission of
acts which would amount to a grave violation of
its franchise
(4) Continuous inoperation for a period of at least five
years
(5) Failure to file by-laws within the required period
(6) Failure to file required reports in appropriate
forms as
determined by the Commission within the
prescribed period
(7) Other grounds
(a) Violation by the corporation of any provision
of the Corporation Code (Sec. 144 BP 68)
(b) In case of a deadlock in a close corporation, and
the SEC deems it proper to order the dissolution
of the corporation as the only practical solution
to the dispute (Sec. 104 BP 68)

A copy of the order shall be published at least once a
week for 3 consecutive weeks in a newspaper of
general circulation, or if there is no newspaper in
the city or municipality of the principal office, posting
for 3 consecutive weeks in 3 public places is sufficient.
Objections must be filed no less than 30 days nor
more than 60 days after the entry of the Order.
After the expiration of the time to file objections, a
hearing shall be conducted upon prior 5 day notice to
hear the objections.
Judgment shall be rendered dissolving the
corporation and directing the disposition of assets.
The judgment may include appointment of a receiver.
By shortening of corporate term
A voluntary dissolution may be effected by
amending the AOI. Upon approval of the amended
AOI or the expiration of the shortened term, as the
case may be, the corporation shall be deemed
dissolved without any further proceedings.
INVOLUNTARY

METHODS OF LIQUIDATION
Liquidation is the process by which all the assets of the
corporation are converted into liquid assets (cash) in
order to facilitate the payment of obligations to
creditors, and the remaining balance if any is to be
distributed to the stockholders. It is a proceeding in
rem.

By expiration of corporate term
Once the period expires, the corporation is
automatically dissolved
without
any
other
proceeding and it cannot thereafter be considered
a de facto corporation.
Failure to organize and commence business within 2
years from incorporation
Failure to formally organize and commence the
transaction of its business or construction of its works
within two years its corporate powers shall cease and
the corporation shall be deemed dissolved

BY THE CORPORATION ITSELF
Under Section 122 of the Corporation Code, a
corporation whose corporate existence is terminated
in any manner continues to be a body corporate for
three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it
and to enable it to settle and close its affairs,
culminating in the disposition and distribution of its
remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond
that period.
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR
PERIOD
From and after any such conveyance by the
corporation of its property in trust for the benefit of
its SH/members/creditors and others in interest, all
interest which the corporation had in the property
terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders,
members, creditors or other persons in interest.

Failure to operate for at least 5 consecutive years
after commencement of business - ground for
suspension or revocation of its corporate franchise or
certificate of incorporation.
Note: Dissolution in this case is not automatic.
(Campos) The corporation may show that the failure
to commence its business or to continuously operate
is due to causes beyond its control (Sec. 22).
Legislative dissolution
The inherent power of Congress to make laws carries
with it the power to amend or repeal them.
Involuntary corporate dissolution may be effected
through the amendment or repeal of the Code.
(implied from Section 145, De Leon)

BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
Upon five (5) days’ notice, given after the date on

Dissolution by the SEC on grounds under existing laws
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which the right to file objections as fixed in the order
has expired, the Commission shall proceed to hear
the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the
material allegations of the petition are true, it shall
render judgment dissolving the corporation and
directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation (Sec. 119)

BAR OPERATIONS COMMISSION

ISSUANCE OR TRANSFER OF STOCK IN BREACH
OF QUALIFYING CONDITIONS
If stock of a close corporation is issued or transferred
to any person who is not entitled under any provision
of the articles of incorporation to be a holder of
record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons
entitled to be holders of record thereof, such person is
conclusively presumed to have notice of the fact of his
ineligibility to be a stockholder.

LIQUIDATION AFTER THREE YEARS
If full liquidation can only be effected after the 3-year
period and there is no trustee, the directors may be
permitted to complete the liquidation by continuing
as trustees by legal implication.

If the articles of incorporation of a close corporation
states the number of persons, not exceeding twenty
(20), who are entitled to be holders of record of its
stock, and if the certificate for such stock
conspicuously states such number, and if the issuance
or transfer of stock to any person would cause the
stock to be held by more than such number of
persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of
this fact.

Other Corporations
CLOSE CORPORATIONS
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20);
(2) All the issued stock of all classes shall be subject
to one or more specified restrictions on transfer
permitted by this Title; and
(3) The corporation shall not list in any stock
exchange or
make any public offering of any of its stock of any
class

If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of stock
of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he
has acquired stock in violation of the restriction, if such
acquisition violates the restriction.
WHEN BOARD MEETING IS UNNECESSARY OR
IMPROPERLY HELD
When unnecessary
Any action by the directors of a close corporation
without a
meeting shall nevertheless be deemed valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the directors; or
(2) All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
(3) The directors are accustomed to take informal
action with
the
express
or
implied
acquiescence of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing
(Sec. 101)

Notes: A corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by
another corporation which is not a close corporation
within the meaning of this Code.
CHARACTERISTICS OF A CLOSE CORPORATION
The stockholders themselves can directly manage the
corporation and perform the functions of directors
without need of election (Sec. 97):
(1) When they manage, stockholders are liable as
directors;
(2) There is no need to call a meeting to elect
directors;
(3) The stockholders are liable for tort.

When improperly held
When a director’s meeting is held without proper call
or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend.

VALIDITY OF RESTRICTIONS ON TRANSFER OF
SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith

UNLESS he promptly files his written objection with
the secretary of the corporation after having
knowledge thereof (Sec. 101)

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PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in payment of
corporate debts, UNLESS the articles of incorporation
provide otherwise (Sec. 102).

BAR OPERATIONS COMMISSION

PURPOSES
(1) Charitable
(2) Religious
(3) Educational
(4) Professional
(5) Cultural
(6) Fraternal
(7) Literary
(8) Scientific
(9) Social
(10) Civic services
(11) Similar purposes, such as chambers
combinations trade, industry or agriculture

AMENDMENT OF ARTICLES OF INCORPORATION
Amendment to the AOI which seeks to:
(1) delete or remove any provision required to be
contained
in the AOI of Close Corporations (under the Title
on Close Corporations); or
(2) reduce a quorum or voting requirement stated
in said AOI

or

TREATMENT OF PROFITS
Any profit which a non-stock corporation may obtain
as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation
was organized.

Requires the affirmative vote of at least 2/3 of the
outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares
as may be specifically provided in the AOI at a
meeting duly called.

DISTRIBUTION OF ASSETS UPON DISSOLUTION

DEADLOCKS

Order of distribution
(1) All its creditors shall be paid.
(2) Assets held subject to return on dissolution
shall be delivered back to the givers.
(3) Assets
held
for
charitable,
religious
purposes,
etc., without a condition for their
return on dissolution, shall be conveyed to one
or more organizations engaged in similar
activities as dissolved corporation
(4) All other assets shall be distributed to
members, as provided in the AOI or by-laws (Sec.
94)

Requisites
(1) The directors or stockholders are so divided
respecting
the management of the corporation's business and
affairs
(2) The votes required for any corporate action
cannot be
obtained that the business and affairs of the
corporation can no longer be conducted to the
advantage of the stockholders generally
Powers of the SEC in case of deadlock in close
corporations
(1) Cancel or alter any provision in the
articles of incorporation or by-laws
(2) Cancel, alter or enjoin any resolution of the
corporation
(3) Direct or prohibit any act of the corporation
(4) Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation regardless of
the availability of unrestricted retained earnings.
(5) Appoint a provisional director
(6) Dissolve the corporation

RELIGIOUS CORPORATIONS
CORPORATION SOLE (SEC. 110)
A special form of corporation, usually associated with
clergy and consists of one person only and his
successors, who are incorporated by law to give some
legal capacities and advantages.
RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious society,
group, diocese, synod, or district of any religious
denomination, sect, or church after getting the
approval of 2/3 of its members.

Granting such other relief as the circumstances
may warrant.

FOREIGN CORPORATIONS
Foreign
corporations
are
those
formed,
organized, or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in its
own country or state (Sec. 123).

NON-STOCK CORPORATIONS
DEFINITION
One where no part of its income is distributable as
dividends to its members, trustees, or officers, subject
to the provisions of this Code on dissolution. (Sec.87)

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BAR OPERATIONS COMMISSION

normally incident to and in progressive
prosecution of the purpose and object of its
organization.

BASES OF AUTHORITY OVER FOREIGN
CORPORATIONS
Consent
As a rule, a foreign corporation can have no legal
existence or status beyond the bounds of the State or
sovereignty by which it is created or incorporated and
organized. It exists only in contemplation of law and
by force of the law and where that law ceases to
operate, the corporation can have no existence. This
principle, however, does not prevent a corporation
from acting in another State or country with the
latter’s express or implied consent. This is the
“consent doctrine” which is provided in Sections 125
and 126. But every power which a corporation
exercises as such in another State depends for its
validity upon the laws of the sovereignty in which it
is exercised. A corporation can exercise none of the
functions and privileges conferred by its charter in
another State or country except by the comity and
consent of such State or country. (De Leon)

Not Doing Business
(1) Mere investment as shareholder and exercise of
rights as investor;
(2) Having a nominee director or officer to
represent its interest in the corporation;
(3) Appointing a representative or distributor
which transacts business in its own name and
for its own account.
NECESSITY OF A LICENSE TO DO BUSINESS
Requisites for issuance of a license
(1) The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a
verified application
(See Sec. 125) accompanied by the following:
(a) Name and address of its designated resident
agent who
will receive summons and notices for the corporation;
a special power of attorney should also be submitted
for such purpose
(b) An agreement that if it ceases to transact
business or if there is no more resident agent,
summons shall then be served through the SEC
(c) Oath of Reciprocity stating that the foreign
corporation’s country allows Filipino citizens and
corporations to do business in said country

Doctrine of “Doing Business” (relate to definition under
the Foreign Investments Act, R.A. No. 7042)
Tests of “Doing Business in the Philippines”
(1) Twin Characterization Test
(a) Under the Continuity Test, doing business
implies a
continuity of commercial dealings and arrangements,
or performance of acts normally incidental to the
purpose and object of the organization.
(b) Under the Substance Test, a foreign corporation is
doing business in the country if it is continuing
the body or substance of the enterprise of
business for which it was organized

(2) Within 60 days from issuance of license, the

corporation should deposit at least P100,000
(cash, property, bond) for the benefit of creditors
subject to further deposit every six months (See
Sec. 126).

(2) Contract test – A foreign corporation is doing

Resident agent
Resident agent is an individual, who must be of good
moral character and of sound financial standing,
residing in the Philippines, or a domestic corporation
lawfully transacting business in the Philippines,
designated in a written power of attorney by a foreign
corporation authorized to do business in the
Philippines, on whom any summons and other legal
processes may be served in all actions or other
legal proceedings against the foreign corporation (Sec.
127-128).

business in the Philippines if the contracts
entered into by the foreign corporation or by an
agent acting under the control and direction of
the foreign corporation are consummated in the
Philippines

“Doing Business” Under the Foreign investment Act of
1991 (Sec. 3(d), RA 7042)
Doing Business
(1) Soliciting orders, service contracts, or opening
offices;
(2) Appointing representatives, distributors domiciled
in the
Philippines or who stay for a period or periods
totaling 180 days or more;
(3) Participating in the management, supervision, or
control of any domestic business, firm, entity, or
corporation in the Philippines;
(4) Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions,

PERSONALITY TO SUE
A foreign corporation transacting business in the
Philippines is required to secure a license to have
the personality to sue before, or intervene in, any
court or administrative proceeding.
(1) if a foreign corporation does business in the
Philippines
without a license, it cannot sue before the
Philippine courts (Sec. 133, Corporation Code);
(2) if a foreign corporation is not doing business
in the
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BAR OPERATIONS COMMISSION

assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
(7) Transacting business in the Philippines outside of
the purpose or purposes for which such
corporation is authorized under its license;
(8) Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed to
do business in the Philippines; or
(9) Any other ground as would render it unfit to
transact business in the Philippines (Sec. 134)

Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a
cause of action entirely independent of any business
transaction
(3) if a foreign corporation does business in the
Philippines without a license, a Philippine citizen
or entity which has contracted with said
corporation may be estopped from challenging
the foreign corporation’s corporate personality in
a suit brought before Philippine courts
(4) if a foreign corporation does business in the
Philippines with the required license, it can sue
before Philippine courts on any transaction

MERGERS AND CONSOLIDATIONS

SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation whether or not doing business
in the Philippines may be sued for acts done against
persons in the Philippines.

DEFINITION AND CONCEPT
Merger – a corporation absorbs the other and
remains in existence while the others are dissolved.
(Sec.76)

INSTANCES WHEN UNLICENSED FOREIGN
CORPORATIONS MAY BE ALLOWED TO SUE
ISOLATED TRANSACTIONS
(1) Isolated transactions, i.e. not ‘doing business’
in the
Philippines, (Sec. 133, Corporation Code);
(2) Action to protect good name, goodwill, and
reputation of a foreign corporation;
(3) The subject contracts provide that Philippine
courts will be the venue to controversies;
(4) A license subsequently granted enables the
foreign corporation to sue on contracts executed
before the grant of the license;
(5) Recovery of misdelivered property;
(6) Where the unlicensed foreign corporation
has a domestic corporation.
(7) When the Philippine citizen or entity is
estopped from challenging the foreign
corporation’s personality to sue

Consolidation – a new corporation is created,
and consolidating corporations are extinguished

GROUNDS FOR REVOCATION OF LICENSE
Under the Corporation Code
(1) Failure to file its annual report or pay any
fees as required by this Code;
(2) Failure to appoint and maintain a resident agent
in the Philippines as required by this Title;
(3) Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
(4) Failure to submit to the Securities and
Exchange Commission an authenticated copy of
any amendment to its articles of incorporation or
by laws or of any articles of merger or
consolidation within the time prescribed by this
Title
(5) A misrepresentation of any material matter in

any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
(6) Failure to pay any and all taxes, imposts,

CONSTITUENT VS. CONSOLIDATED
CORPORATION
Constituent corporations – the parties
merger or consolidation
Consolidated corporation – the new
corporation created through consolidation.

to

a

single

Surviving corporation – one of the constituent
corporations which remain in existence after the
merger
PLAN OF MERGER OR CONSOLIDATION (Sec. 76)
Each of the constituent corporations must draw up a
Plan of
Merger or Consolidation which shall set forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the present
articles of the surviving corporation to be
formed in the case of merger; and with respect
to the consolidated corporation in case of
consolidation
ARTICLES OF MERGER OR CONSOLIDATION
Each of the constituent corporation shall execute
Articles of
Merger or Consolidation signed by the president/vicepresident, and certified by the secretary/assistant
secretary setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the
number of
shares outstanding; for non-stock, the number of
members;
(3) As to each corporation, number of shares or
members voting for and against such plan
respectively.
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stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right shall
be extinguished.
(5) Amendment to the plan of merger or
consolidation may
be made by approved of the majority vote of the
respective boards of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or
of two-thirds (2/3) of the members of each of the
constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of
merger or consolidation.

The Articles of Merger or Consolidation:
(1) take the place of the Articles of Incorporation
of the consolidated corporation; or
(2) amend the Articles of Incorporation of the
surviving corporation.
PROCEDURE
(1) The board of each corporation shall draw up a
plan of merger or consolidation.
(2) The plan of merger or consolidation shall be
approved by majority vote of each of the board
of the concerned corporations at separate
meetings, and a vote of 2/3 of the members or
of stockholders representing 2/3 of the
outstanding capital stock. Holders of non-voting
shares or non-voting members are entitled to
vote on the plan (Sec. 6, par. 6(6))
Any amendment to the plan must be approved by
the majority vote of the board members or trustees
of the constituent corporations and affirmative vote
of 2/3 of the outstanding capital stock or members.
(3) Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
(4) Submission of Four (4) copies of the Articles of
Merger or Articles of Consolidation to the SEC for
approval. Mergers and consolidations of
corporations governed by special laws requires a
recommendation
from
the
appropriate
government agency (Sec. 79 (1)
(5) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least two
(2) weeks before.
(6) Issuance of certificate of merger or consolidation.

EFFECTIVITY
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation shall
become effective (Sec. 79).
Nothwithstanding Section 79, parties may stipulate a
specific effective date of merger (or consolidation)
where no third party will be prejudiced (SEC Opinion
No. 09-13, July 1, 2009).
LIMITATIONS
In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained.
EFFECTS ( Sec. 80)
(1) The constituent corporations shall become a
single corporation.
(2) The separate existence of the constituents shall
cease, except that of the surviving or the
consolidated corporation. The absorbed or
constituent corporations are ipso facto dissolved
by operation of law; there is no liquidation of the
assets of the dissolved corporations (Campos).
(3) The surviving or the consolidated corporation
shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties
and liabilities of a corporation.
(4) The surviving or the consolidated corporation
shall possess all rights, privileges, immunities
and franchises of each constituent corporation
and the properties shall be deemed transferred
to and vested in the surviving or consolidated
corporation without further act or deed.
(5) All liabilities of the constituents shall pertain to
the surviving or the consolidated corporation
[assumption of liability is automatic
(6) Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation; and
(7) The rights of the creditors or lien upon the
property of any of each constituent corporation

Procedure under Sec. 77:
(1) Approval by majority vote of each of the
board of directors or trustees of the constituent
corporations of
the plan of merger or consolidation.
(2) Approval by the stockholders or members of
each of such corporations. The affirmative vote
of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the
case of stock corporations or at least two-thirds (2/3)
of the members in the case of non-stock corporations
shall be necessary for the approval of such plan
(3) Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least two (2) weeks prior to the
date of the meeting, either personally or by
registered mail. Said notice shall state the
purpose of the meeting and shall include a copy
or a summary of the plan of merger or
consolidation.
(4) Any
dissenting
stockholder
in
stock
corporations may
exercise his appraisal right in accordance with the
Code. Provided, that if after the approval by the
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